The safest ways to store Bitcoin and other altcoins

As cryptocurrency becomes more mainstream, more traders are recognizing the value of economic autonomy and managing their investments without intermediaries. But, as the age-old saying goes, with more freedom comes more responsibility. Unlike the traditional world of finance, where banks safeguard your assets, keeping your crypto safe is entirely up to you. 

In this guide, we’ll explore the typical security precautions crypto traders take and the safest ways to store Bitcoin (BTC) and other cryptocurrencies.

Why does crypto need storage?

Think of crypto – whether Bitcoin or another altcoin – like a digital photo or PDF file. It needs to be stored on a memory device, such as a computer's hard drive or a USB flash drive, so the owner can access it while keeping it secure from others. Otherwise, it could be lost, stolen, or exposed to unauthorized parties.

Crypto storage devices are known as wallets and come in physical (cold) and digital (hot) forms.

Cold wallets vs. hot wallets

Many traders consider physical devices (aka cold wallets) to be the most secure way to store cryptocurrency. They provide a high level of security by keeping access to assets offline and out of the reach of hackers.

On the other hand, software wallets, or hot wallets, are downloadable applications for computers and mobile devices that stay connected to the internet. They offer greater convenience for traders needing quick crypto access for regular transactions.

Choosing between cold storage and hot wallets is a personal decision that depends on a trader's unique needs and investment goals. Many traders use both types, keeping a small amount of crypto in a hot wallet for daily use while storing the majority of their assets in cold storage for enhanced security.

How do crypto wallets work?

Crypto wallets allow traders to manage their digital assets, but they don't actually store cryptocurrency. Instead, they store private keys, which are essential for verifying transactions and proving ownership of cryptocurrency on a blockchain network. The blockchain is an immutable public ledger that records all transactions, including details like:

• The amount transferred
• The network fees (gas fees) charged to the sender
• The unique public addresses of the sender and recipient involved in the transaction

A wallet's public address is like a checking account number. Anyone can send funds to an account with the correct number, but only the account owner can access and manage those funds. Similarly, when a trader initiates a transaction using their crypto wallet, they generate a digital signature with their private key. This signature is then broadcasted to the blockchain network, proving that the trader owns the crypto being sent without exposing their private key.

A wallet's private keys are cryptographically generated codes that establish ownership of the wallet's public address and are crucial for creating digital signatures. The wallet uses these private keys to authenticate transactions without revealing them to the network. Instead, the network verifies the transaction using the digital signature and confirms the public address associated with the trader's wallet.

Because private keys are the ultimate proof of a trader's ownership of their crypto, it's critical to keep them secure. Anyone who has them has full access to the funds in that wallet.

Crypto security tips

Keeping your crypto secure is all about taking the right precautions. Here are some important steps you can take to protect your digital assets:

Back up your wallet

Regularly backing up your digital wallet is crucial to safeguarding your crypto assets. A backup is a copy of the wallet file that can be restored if your original wallet is lost, stolen, or corrupted. It's best to store backups on multiple external devices, such as USB drives or external hard drives, in different physical locations to minimize the risk of loss due to theft, fire, or other disasters. Always encrypt your backups with a strong password to prevent unauthorized access.

Update your software

Keeping your software wallet up to date is a must. Using outdated software can leave your wallet vulnerable to attacks, so regularly check for updates from the wallet provider and install them as soon as they are available. 

Use a multisignature wallet

Multisignature (multisig) wallets require multiple keys to authorize a transaction, enhancing security by reducing the risk of theft or unauthorized access. For instance, you might set up a multisig wallet that requires three out of five authorized signatures to approve a transaction. This setup is particularly useful for organizations or partnerships where multiple approvals are needed for financial decisions. However, it is crucial to ensure that all parties involved are trusted and knowledgeable about security practices to prevent any internal threats.

Secure your seed phrase

The seed or recovery phrase is a series of randomly generated words that back up your private keys. In other words, it's the only way to recover your wallet if lost or damaged. Write it down on paper and keep it somewhere safe, like a deposit box or a safe. Do not store it digitally, as online storage is susceptible to hacking. Remember, anyone with access to your seed phrase can control your wallet and its contents, so be extremely careful about whom you share it with. 

Enable two-factor authentication (2FA) 

Many digital wallets and crypto exchanges offer two-factor authentication as an extra layer of security. 2FA requires a second form of verification, such as a code sent to your mobile device, in addition to your password. This measure significantly reduces the risk of unauthorized access to your accounts.

Use a hardware wallet for large holdings

For substantial amounts of crypto, consider using a hardware wallet to store private keys offline. Hardware wallets, such as Ledger or Trezor, provide robust protection against online threats, as they are not connected to the internet and are less susceptible to hacking. They’re ideal for long-term storage of significant amounts of cryptocurrency.

Be cautious with public wifi

When accessing your wallet or making transactions, avoid using public wifi networks, which can be less secure and more susceptible to hacking. Instead, use a private, secure internet connection or a virtual private network (VPN) to encrypt your internet traffic and protect your data from potential eavesdroppers.

Stay vigilant against phishing attacks

Phishing attacks, where malicious actors attempt to trick you into revealing sensitive information such as private keys or login credentials, are common in the crypto world. Always double-check URLs, be wary of unsolicited messages or emails, and never click on suspicious links. Use browser extensions that block known phishing sites to add an extra layer of security.

The ultimate solution for secure crypto tax reporting: CoinTracker

Crypto taxes can be complicated, but protecting your financial data shouldn't be. CoinTracker not only simplifies tax preparation by syncing with all your wallets and exchanges, but it also prioritizes your security with features like end-to-end encryption, two-factor authentication, and strict privacy protocols.

Whether you're managing DeFi transactions, NFTs, or high-frequency trades, CoinTracker captures every detail and generates precise, IRS-ready tax reports in minutes. With robust fraud prevention measures and expert support, CoinTracker safeguards your crypto activity while ensuring compliance.

Join over 2 million users who trust CoinTracker to protect their data and streamline their crypto taxes. Get started for free today.

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.